Journalists Discuss Monetary Alchemists

Over the weekend, C-SPAN several times ran an interview of Washington Post columnist Neil Irwin on his new book, titled “The Alchemists: Three Central Bankers and a World on Fire.” Irwin was interviewed by David Wessel, a prominent financial journalist with The Wall Street Journal.

Simultaneously, The Post ran an article by Irwin on the front page of its Outlook section titled “Why the financial crisis was bad for democracy,” a rambling piece about his views on the relative merits of determining public policy through some sort of democratic process or by regulatory fiat or Volvo, one of the issues raised in the book and in the discussion with Wessel.

As the interview began, Irwin introduced his main subject, Federal Reserve Chairman Ben Bernanke, recalling the irony that at the time Bernanke was tapped by President George W. Bush to move from his post as chairman of the Council of Economic Advisers (CEA) to the Fed as a governor, Bernanke was contemplating returning to Princeton, where he had been passed over for the job of provost.

Irwin observed that the public duties Bernanke assumed as Fed chairman did not come naturally, and he had to consult a speech coach in an effort (I would assess as largely unsuccessful) to overcome a nervous quaver in his vocal delivery. Also, it took a while for Bernanke to adjust to the practice of senators being courteous in private meetings but attacking him in public sessions.

The format of the book was based on a comparison of the leadership styles of the world’s leading central bankers, as revealed by their performance during the 2008 episode of the ongoing financial crisis.

Wessel elicited Irwin’s views and invited him to assign a letter grade to each, beginning with Bernanke. Without hesitation, Irwin gave Bernanke an A, crediting him with decisive action after the failure of Lehman Brothers and with taking the time to understand why monetary policy did not initially produce the hoped-for results in stimulating the economy, then moving more decisively to use all available tools “to get the U.S. economy to a better place.”

By contrast, Irwin described Jean Claude Trichet, who headed the European Central Bank (ECB) from 2003 to 2011, as a lifetime civil servant who had worked his way through the Treasury and the Bank of France and made his life’s work the management of the transition from individual currencies of the respective countries to the euro.

Irwin credited Trichet with the skills of an experienced crisis manager, gained during earlier crises in the emerging markets, and an able arm twister, but he downgraded Trichet’s standing as an economist as compared with Bernanke. Irwin gave Trichet a C, criticizing him for being slow to intervene in the bond markets and for raising interest rates during the crisis.

Irwin expressed a more positive view of current ECB President Mario Draghi, based on the same criteria, because Draghi’s ascension represents a greater willingness to intervene, especially since he proclaimed in a speech last July in London that he would do “whatever it takes.” Irwin added that Draghi enjoys the tacit support of the German government, though not of the Bundesbank.

He described Draghi as a more skillful politician than Bernanke is, less restrained by moral compunctions. Perhaps Irwin is selling Bernanke a bit short as to political skill and abandon.

Irwin’s third monetary alchemist is the Bank of England’s Mervyn King, who is about to be replaced by Mark Carney, current governor of the Canadian Central Bank. Irvin called King a “charmer,” yet one who clashes with everyone and employs sharp elbows. Irwin credited King for defining the role of the Bank of England for many years, but he give King no more than a C- for his efforts, as King had ceded regulatory authority to the Financial Services Authority. Irwin blamed King for advocating the fiscal austerity that has led to four years of stagnation in the British economy.

Taken as a group, Irwin praised the alchemists for achieving a degree of collegiality that did not exist during the period leading up to the Great Depression. He attributed this to the practice of meeting often at venues like the Bank for International Settlements, where they share sumptuous dinners and partake of the fruits of its outstanding wine cellar. Thus they have evolved what Irwin calls “a community of purpose.”

Wessel led Irwin through a discussion of the mechanics of the Fed’s aggressive intervention over the past five years, including swap arrangements with the ECB and propping up foreign banks by allowing them to borrow from the Fed through their U.S. offices, a program that became public only as a result of Freedom of Information Act requests, discovery and reports mandated by the Dodd-Frank Act. I would say that both journalists missed the point that the “too big to fail” banks were being bailed out by means of this back-door lending to the eurozone.

Irwin acknowledged that the Fed’s actions have contributed to a narrowing of risk premiums, reflecting complacency in financial markets and raising the risk that new bubbles have been created. He predicted that figuring out how to manage this circumstance, deciding when to unwind quantitative easing, will be the main preoccupations of Bernanke’s successor, most likely the current vice chairman, Janet Yellen.

The overriding them of Irwin’s book is that the monetary alchemists have been willing to take decisive action when democratic institutions, such as legislatures, have failed. Irwin admits to being a bit troubled by the implications of this shift of power, but he has clearly bought the “only game in town” thesis advanced by Sen. Chuck Schumer, D-N.Y., and by the extensive community of “fedophiles.”

In the Post piece, Irwin credited the Fed, as the Fed credits itself, for saving the financial system, then expressed some ambivalence that in its emergency actions, including the rescue of Bear Stearns, “the closest thing to a blessing the Fed received from democratically elected officials was a letter from then-Treasury Secretary Hank Paulson supporting the actions.” (That’s not very close. For those keeping score at home, the Treasury Secretary is not an elected official.)

This book provides a useful service by presenting the central bankers as an interactive group, but it appears to me that both of these journalists may have been mesmerized by the Fed’s vaunted spin machine.

Over the weekend, C-SPAN several times ran an interview of Washington Post columnist Neil Irwin on his new book, titled “The Alchemists: Three Central Bankers and a World on Fire.” Irwin was interviewed by David Wessel, a prominent financial journalist with The Wall Street Journal.